Israel has said it will not backtrack on a settlement expansion plan after Britain, France and three other European governments summoned the Israeli ambassadors to London and Paris in protest at the authorisation of 3,000 new homes in the West Bank and in East Jerusalem.

An official in the office of the Israeli prime minister, Binyamin Netanyahu, said: "Israel will continue to stand by its vital interests, even in the face of international pressure, and there will be no change in the decision that was made."

The British prime minister's spokesman said Alistair Burt, the Foreign Office minister, had met the Israeli ambassador in London on Monday morning to complain about the new building programme, and that the Foreign Office had put out its own statement about the row. Sweden, Denmark and Spain also summoned Israeli ambassadors in protest at the plan.

Downing Street played down reports that Britain might withdraw its ambassador from Israel, but refused to completely rule it out as an option.

"We are not proposing to do that," the spokesman said when asked about the suggestion that Britain was planning to take the extraordinary step of withdrawing its ambassador. He said: "We are not proposing to do anything further at this stage" – suggesting that a withdrawal had not been completely ruled out. Asked to clarify, the spokesman said: "We are consulting with our international partners and discussing the situation with the Israeli government."

The recall of the British ambassador would be a dramatic and unprecedented rebuke to the Israeli government, whose isolation was sharply illustrated by the overwhelming backing for the state of Palestine in New York last week. Only eight countries out of 193 rallied to Israel's side in opposing the move.

A Foreign Office spokesperson said on Monday: "We deplore the recent Israeli government decision to build 3,000 new housing units and unfreeze development in the E1 block. This threatens the viability of the two-state solution.

"We have called on the Israeli government to reverse this decision. The Israeli ambassador to London, Daniel Taub, has been formally summoned to the Foreign Office this morning by the minister for the Middle East, Alistair Burt. The minister set out the depth of the UK's concerns.

"Any decision about any other measures the UK might take will depend on the outcome of our discussions with the Israeli government and with international partners, including the US and EU."

The development of E1 has been frozen for years under pressure from the US and EU. Western diplomats regard it as a "game-changer" as its development would close off East Jerusalem – the future capital of Palestine – from the West Bank.

Britain has demanded that Israel rescind the decision. The UN secretary general, Ban Ki-moon, said the settlement expansion plans "would represent an almost fatal blow to the remaining chances of securing a two-state solution".

The EU foreign affairs chief, Catherine Ashton, said such expansion "may represent a strategic step undermining the prospects of a contiguous and viable Palestine with Jerusalem as the shared capital of both it and Israel".

In France, the foreign minister, Laurent Fabius, said Israel's plans were a "new area of colonisation" and, if confirmed, would "sap the necessary confidence in a resumption of talks".

He said: "I call on the Israeli authorities to abstain from all decision regarding this and to show clearly their willingness to restart negotiations."

He summoned the Israeli ambassador to France, Yossi Gal, to express his unhappiness over the project.

French media reported that London and Paris were considering joint action that would send a "strong diplomatic signal". However, Paris also refused to confirm rumours that it was planning to pull out its ambassador.

"There are other ways of marking our disapproval," a ministry spokesperson said.

France, Britain and the EU have all protested directly to the director general of the Israeli foreign affairs ministry, Rafi Barak.

Other steps under consideration are sanctions against settlements in the West Bank and East Jerusalem, including tougher measures on the labelling of settlement produce exported to Europe, and the suspension of strategic dialogue meetings.

The UK and other EU countries had warned Israel against taking punitive action in response to the UN vote. A statement issued by the British embassy in Tel Aviv said: "The foreign secretary has consistently made it very clear that the UK would not support a strong reaction to Thursday's UNGA resolution that undermined the prospects for negotiations and efforts to build a strong foundation for the peace process. The recent Israeli government decision to build 3,000 new housing units threatens the two-state solution and makes progress through negotiations harder to achieve. We have called on the Israeli government to reconsider."

The Israeli cabinet unanimously rejected the UN vote at its weekly meeting on Sunday. It described the West Bank as "disputed territory" over which the Jewish people had "a natural right".

Israel's Channel 2 reported that Rahm Emanuel, Barack Obama's former chief of staff, had described the behaviour of the prime minister, Binyamin Netanyahu, as "unfathomable".